Vonage's Customer Focus: Retention

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PC-Free Devices

While Vonage would not disclose details on any upcoming products, V-Portal's design suggests a direction common among Web-based phone services, many of which are trying to enable users to message friends, check e-mail, and even surf Web sites without a PC, says Will Stofega, an analyst with IDC (IDC). The goal is to differentiate themselves in a market where nearly every vendor offers the same basic service.

In November, for example, eBay's (EBAY) Skype unit introduced its own branded cell phone (BusinessWeek.com, 10/18/07) in Europe and Asia with the wireless carrier 3. And ooma, a startup backed by powerful venture capitalists including Draper Fisher Jurvetson, recently began selling a $400 device that offers unlimited Internet calls (BusinessWeek.com, 7/19/07).

Settled Suits, Unsettled Future

In the end, the MyVonage initiative is all about customer retention, long one of Vonage's biggest headaches, and a problem that grew especially dire in 2007 after the company was found guilty of infringing patents held by Verizon (VZ) and Sprint Nextel (S). Owing to fears those verdicts might force Vonage to shut down, the pace of customer losses reached 3% of the subscriber base per month during the third quarter. If that rate of customer defections were to persist for an entire year, Vonage would lose a third of its 2.5 million customers.

Although it maintains its innocence, Vonage opted to settle those suits, as well as still-pending cases brought by AT&T (T) and Nortel Networks (NT).

While the settlements leave Vonage's financial health in questionable shape—analysts say management may need to secure new funding to continue operations beyond December, 2008, when $250 million in notes could come due—they've allowed jittery employees to refocus on operations instead of legal worries. "They need to continue to cut expenses and lower their cash burn," says Chris Roberts, an analyst with Tejas Securities Group. Even if all goes well, he says, the company won't reach profitability until late 2009 at the earliest. But he adds: "Their outlook now is better than it's been in the past six months."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.